Bank crisis: The reckoning that lies ahead

At the macro level it is hard to fault the British government's banking recapitalisation plan.

It is bold, has set the standard for similar packages in France and Germany and looks finally to have stabilised share prices - at least in London.

It is an approach which Mervyn King, the governor of the Bank of England, first advocated late last year but has taken a long time to come to fruition.

The belief initially was that private sector efforts to plug the gaps in bank balance sheets, after the sub-prime mortgage fiasco, would suffice.

But as we now know the rights issues by Royal Bank of Scotland, Halifax Bank of Scotland and Bradford & Bingley (r.i.p.) proved hopelessly inadequate.

What was needed was a system-wide approach as had been seen in Sweden, Japan and Finland in recent decades, and that is what Gordon Brown and Alistair Darling delivered.

Work on the comprehensive approach has been ongoing at Threadneedle Street and in Whitehall since last month as a contingency plan.

No one quite anticipated how quickly it would be rushed out. In retrospect the American decision to allow Lehman to fail was a disaster.

It has been a time bomb increasing distrust among financial institutions as its billions of dollars of toxic contracts have unwound.

The final straw was the 'beggar-thy-neighbour' steps taken by Ireland et al which brought the global banking system to the brink and sent shudders through the stock market.

There is a tendency to regard the stockmarket as a casino, full of nervous panicking dealers, who have little understanding of the real world.

But it has been fantastically efficient in the current crisis in both outing the weaklings among the banks and knocking down prices to the point that they are close to reality.

The £20bn bailout of RBS, after robust 'stress testing' by the Financial Services Authority, explains exactly why its shares came under such attack last week.

There is no way it could have withstood the loan impairments which would have come with recession.

Until the last week the government has persisted with a piecemeal approach to the banking crisis thrust upon it by lenders and investment bankers. This meant constant bickering over the scale of the special liquidity scheme, the money market operations of the Bank of England, surging interbank rates and so forth.

The difference now is that the government and the Bank went for an economic approach which looked at the trade cycle, the likely scale of bank losses as the world deleveraged and what would be needed in case of slump. This is not to say that what has emerged, now that the smoke has cleared, is pretty.

No one wants to see the Royal Bank of Scotland (or should we call it Royal Bank of Britain, now) in the majority hands of the government. Nor does it make much sense at all for the government to be promoting the super-bank merger of Lloyds TSB and HBOS now that both have had their separate recapitalisations. The competition laws should be reinstituted in a new situation.

Putting aside Standard Chartered and HSBC, both of which are largely overseas banks with a British home and ownership, the most courageous of the banks is Barclays

In much the same way as it eschewed a rights issue in June and instead raised new capital from outside investors and an open offer, it is going it alone again. This time it is seeking to raise £6.1bn to meet the demands of the FSA and government. Last night the bank claimed to have received a promise of the first £1bn from an unnamed investor.

It will also improve its capital by temporarily scrapping the dividend which could improve its position by another £2bn. Barclays believes that without the government sitting on its back it is better placed than rivals to win consumer, corporate and investment banking business.

Certainly, it must be a relief not to have officials breathing down its neck. One trusts that its confidence in BarCap and its current markdowns of mortgage assets is not misplaced and that John Varley and Marcus Agius, bankers to the core, can look after themselves.